Apple: Sweetness Regained

August 02, 2004

During his second tenure as Apple's CEO, Steven P. Jobs has recorded many triumphs. He brought the stumbling computing concern back from the brink by slashing costs, simplifying product lines, and refocusing Apple on its heritage of smart, innovative industrial and software design. He cemented Apple's hold on the lucrative creative market and forged ahead into new markets in digital music, wireless base stations, and software for making movies and music. And Jobs executed an impressive feat in building the first Unix operating system simple enough for technophobes to easily master.

Although Jobs has long had a reputation as a micromanager, he brought in top-caliber executives. Former Target (TGT) marketing guru Ron Johnson has turned Apple's retail stores into a stunning success. From Compaq (HPQ) came logistics and operations maestro, Tim Cook, who has made Apple one of the leanest, most efficient computing companies around. Perhaps most important of all, Jobs has built a staggering cash stash of $4.6 billion, a fat rainy-day fund that Apple can tap for acquisitions, weathering rough times, or paying dividends that are increasingly common in the technology sector.

SIGNS OF A REVIVAL. Should Jobs need to step down in the near future, the charismatic CEO would leave Apple in its best shape in nearly a decade. The possibility of Apple without Jobs was suddenly raised by his Aug. 1 revelation that he had a cancerous tumor removed from his pancreas and would need to rest for a month, ceding the reigns to Cook until at least September.

Yet the CEO's glowing achievements are easily dismissed by many competitors and analysts as Pyrrhic victories in a long, losing war against the Microsoft-Intel platform. Apple's global market share has shrunk to a rounding error of roughly 3%. In a world that consumes well over 100 million PCs each year, Apple sells just over 3 million of them. The doomsayers have long opined that even Jobs' virtuoso performance has only postponed Apple's inevitable demise under the relentless onslaught of Windows. Even the runaway popularity of Apple's iPod digital music player won't save Apple from irrelevance, they intone.

The iPod, plus Apple's growing retail presence, is putting the Mac bug in the brain of a far broader demographic of potential customers

Not so fast, say Macheads. In the past year, tantalizing signs of an Apple revival have emerged. In the education sector, where a few years ago Apple looked like roadkill due to Dell's (DELL) rapid advances, Macs are making a nifty comeback. In higher education, Apple has racked up stellar 40% shipment growth in each of the last three quarters, and its market share has crept up nearly 1%, to roughly 11%, according to IDC.

In the market for sales to K-12, Apple's laptops have gained 3.2% market share over the past year -- even as desktop sales have slipped. That's crucial because the education markets are swiftly ditching desktops for notebooks. Further, young scholars are tomorrow's computer buyers, and the more they learn to love the Mac, the better that will be for Jobs & Co.

ELUSIVE HALO? After years of Apple sales to the government and large corporations drifting aimlessly, the outfit has finally started to win a serious following there, too, based largely on its well designed and highly versatile rack-mounted servers. They have won kudos for their $3,000 price, which actually puts the cost of Apple's product below that of other comparable boxes. Apple doesn't break out figures for Xserves, but analysts say sales have roughly doubled in the last year, to about 10,000 units. And the PowerBook notebook has won converts as a hybrid -- part high-powered Unix workstation and part PC.

Apple even appears poised to make some headway in the rarified realm of supercomputers. A November, 2003, Virginia Tech project that lashed together 1,100 new G5 Macs with 64-bit processors to build what was then the third-fastest supercomputer on earth, stoked interest in using G5 chips for building massive computing clusters. A second monster G5 cluster for another customer is on the way, and Apple's now open-source software that was used to make systems like Virginia Tech's machine work has gotten rave reviews.

True, the "halo" effect that many analysts have predicted the iPod would create has remained elusive. Even Apple has no real evidence of consumers switching en masse from PC to Macs because of the iPod's popularity. But there's evidence that the iPod, plus Apple's growing retail presence, is putting the Mac bug in the brain of a far broader demographic of potential customers -- including women, kids, and others who are not typical PC buyers. According to one study cited by Philip Schiller, Apple's senior vice-president of worldwide product marketing, the second-most-requested Christmas gift last year was an iPod, lagging only behind sneakers.

CROSS-PLATFORM APPEAL. Schiller and other Apple executives say the halo effect might well take longer than the two years that iPods have been available for Windows machines. That could be key because the cross-platform iPod, more than anything else, has attracted non-Mac users to Apple stores, says Schiller. Needham & Co. analyst Charles Wolf says at least one-third and possibly two-thirds of the people buying iPods are PC users.

Even if the halo effect never materializes, Apple has plenty of new irons in the fire as Jobs & Co. enter a period of promise and, perhaps, prosperity. By Alex Salkever